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Retirement Accounts and Taxes

Retirement accounts offer tax advantages and are generally simpler to handle at tax time than other types of investment accounts. There are a few issues to keep in mind, however.

Whether you’re saving for retirement or are currently in retirement, you should be aware of certain information about retirement accounts when preparing your federal income tax returns.

The information in the tabs below is the most commonly useful for many investors; however it may not be everything you need to know, as some scenarios can be complex. Consult IRS form instructions and publications or your tax advisor as necessary.

Deducting Traditional IRA contributions

You may be able to deduct certain Traditional IRA contributions from your taxable income. For the income limits associated with deductible contributions, see IRA Contribution Limits and Deadlines. Fidelity issues Form 5498, IRA Contribution Information, showing your contribution amounts and other information about your Fidelity IRAs. For help with this statement, see Form 5498 guide for IRA contributions.

Deduct IRA contributions made up to April 15

Note that the deadline to make deductible contributions for a given tax year is usually April 15 of the following year. Most other deductions are only allowed for transactions completed within the tax year, by December 31.

Enter the deduction amount on line 32 of your 1040 or on line 17 if you use the 1040A. If you made non-deductible contributions, you will need to file Form 8606 (see the 1040 instructions for details).

When it comes time to withdraw from your Traditional IRA, any contributions you deducted and any earnings will be fully taxable. For any withdrawals of nondeductible contributions, only the earnings will be taxable.

Pre-tax contributions to qualified plans, such as 401(k)s and pensions, are not deductible, as they are already excluded from your taxable income. Post-tax Roth IRA contributions are also not deductible.

Early withdrawals

If you make early withdrawals from retirement plans—that is, before you turn 59½—they will generally be subject to a 10% penalty, in addition to federal income tax due at your ordinary rate.

If you made withdrawals (whether early or not), you must report those distributions as taxable income on your form 1040, 1040A, or 1040NR. Fidelity reports distributions to you on Form 1099-R. For more details on Form 1099-R and reporting the withdrawals on your return, see Form 1099-R guide for retirement distributions.

You must also calculate and pay the 10% penalty. You may need to file Form 5329 to do so; however, if the penalty is all you are reporting on Form 5329, you may be able to report it directly on your 1040 (line 58) or 1040NR (line 56). See the 1040/1040NR instructions for details.

Early withdrawals are permissible without the 10% penalty in certain circumstances, including those listed below.

Exceptions to Early Withdrawal Penalties

For 401(k)s and 403(b)s

For IRAs

Distributions were made due to total and permanent disability.

Distributions were made due to total and permanent disability.

You left the company sponsoring the plan in or after the year you turned 55.

You were unemployed and paid health insurance premiums.

You had medical expenses greater than 7.5% of your adjusted gross income (AGI).

You had medical expenses greater than 7.5% of your adjusted gross income (AGI).

Withdrawals were made as part of an IRS levy of the plan.

Withdrawals were made as part of an IRS levy of the plan.

The distribution was made according to a qualified domestic relations order (QDRO) plan.

You paid for qualified higher education expenses for yourself or a dependent.

Withdrawals from a Roth IRA

Withdrawals from a Roth IRA are generally not taxable as long as the assets have been in the account for at least five years. The 10% early withdrawal penalty will apply, however, for those under age 59½.

401(k) rollovers

When you roll over your 401(k) or other qualified plan into an IRA, you usually don’t incur immediate taxable income, since the tax continues to be deferred until you withdraw the money in retirement. This is true as long as the money was either rolled directly into the IRA or deposited into it within 60 days of the distribution from the 401(k).

Many rollovers are done directly. Otherwise, if you receive a check, taxes will be withheld and you will have to add money to the deposit in the IRA to make up for them. The tax withheld is included in your tax paid when you file your tax return.

Rolling over your 401(k) into a Roth IRA is a very similar process to converting to a Traditional IRA. However, any pre-tax funds that you roll over will be taxed as ordinary income in the year of conversion, and as a result, could push you into a higher marginal federal income tax bracket. Only after-tax contributions can be rolled over without incurring taxes.

If you rolled over your employer-sponsored plan account directly into a Fidelity IRA, you will receive a Form 1099-R from the trustee of the plan showing the distribution, as well as a Form 5498 from Fidelity showing the IRA rollover.

Reporting distributions

Distributions from retirement accounts of $10 or greater are generally reported to you on Form 1099-R. You must report these distributions to the IRS on Form 1040 or Form 1040A. Depending upon your circumstances, you may need to report:

IRA distributions

Pension and annuity distributions

Tax on IRAs or other retirement plans (you may need to complete Form 5329)

For IRAs, any contributions you claimed as deductions throughout the life of the account will be fully taxable when distributed. For any withdrawals of nondeductible contributions, only the earnings portions will be taxable when distributed. No additional penalty generally applies as long as you were at least 59½ when you took the distribution.

You may need to file Form 8606 with your return as well, if you:

Received a distribution from a retirement plan for which you made nondeductible contributions,

Made conversions to a Roth IRA, or

Recharacterized contributions to or from a Roth IRA.

Minimum required distributions (MRDs)

MRDs are taxable according to the same rules as other withdrawals.

If you don’t take an MRD as required, you may have to pay a 50% excise tax on the amount not distributed. You must report it on Form 5329 and file it with your 1040 (you cannot use the 1040A if you file Form 5329).

You are not required to take MRDs from a Roth IRA during your lifetime, nor can you satisfy your Traditional IRA MRD requirement with a withdrawal from a Roth IRA.

Withdrawals from a Roth IRA

Withdrawals from a Roth IRA are generally federal income tax- and penalty-free, as long as the funds were in the IRA at least five years. They are also not generally subject to the 10% early withdrawal penalty.

401(k) rollovers

When you roll over your 401(k) or other qualified plan into an IRA, you usually don’t incur immediate taxable income, since the tax continues to be deferred until you withdraw the money in retirement. This is true as long as the money was either rolled directly into the IRA or deposited into it within 60 days of the distribution from the 401(k).

Many rollovers are done directly. Otherwise, if you receive a check, taxes will be withheld and you will have to add money to the deposit in the IRA to make up for them. The tax withheld is included in your tax paid when you file your tax return.

Rolling over into a Roth IRA is similar to rolling over into a Traditional IRA and will not incur tax if rolled over directly. Only money held in a designated Roth account can be rolled over into a Roth IRA.

If you rolled over your employer-sponsored plan account directly into a Fidelity IRA, you will receive a Form 1099-R from the trustee of the plan showing the distribution, as well as a Form 5498 from Fidelity showing the IRA Rollover.

See IRS Publication 590 for tax information on IRAs and Publication 575 for tax information on 401(k)s.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.